On many occasions we have heard that a company is working at its equilibrium point or that it is necessary to sell a certain number of units and that the sales value must be higher than the equilibrium point; however we believe that this term is not clear enough or contains information that only financial experts are able to decipher.
However, the reality is different, the break-even point is a financial tool that allows us to determine the moment in which sales will exactly cover costs, expressed in values, percentage and / or units, and also shows the magnitude of profits or losses of the company when sales exceed or fall below this point, in such a way that this comes to be a point of reference from which an increase in sales volumes will generate profits, but also a decrease will cause losses, for this reason Some important aspects such as fixed costs, variable costs and sales generated should be analyzed.
For the determination of the equilibrium point we must first know the fixed and variable costs of the company; variable costs being understood as those that change in direct proportion to the production and sales volumes, for example: raw materials, piece labor, commissions, etc.
For fixed costs, those that do not change in direct proportion to sales and whose amount and recurrence is practically constant, such as the rent of the premises, wages, depreciation, amortization, etc. In addition we must know the sale price of it or the products manufactured or marketed by the company, as well as the number of units produced.
When obtaining the equilibrium point in value, the following formula is considered:
PE $ = Fixed Costs /
Let's consider the following example where fixed and variable costs, as well as sales are located in the formula with the following results:
PE $ = $ 295,000 /
PE = $ 572,440
The result obtained is interpreted as the necessary sales for the company to operate without profit or loss, if the business sales are below this amount the company loses and above the mentioned figure are profits for the company.
When it is required to obtain the equilibrium point in percentage, the same concepts are handled, but the development of the formula is different:
PE% = x 100
Being the same values, they are located according to how the formula asks for it to obtain the desired result:
The percentage that results with the data managed indicates that of the total sales, 70% is used for the payment of fixed and variable costs and the remaining 30% is the net profit obtained by the company.
The other analysis of the breakeven point refers to the units, using variable costs for this analysis, as well as the breakeven point obtained in values and the total units produced, using the following formula:
PE U = Fixed Costs x Units Produced / Total Sales - Variable Costs
Therefore, the result will indicate the amount of units to sell:
PE U = $ 295,000 x 2,250 / $ 815,000 - $ 395,000
For the company to be at a point where there are no losses or gains, 1,580 units must be sold, considering that as the units sold increase, the profit will increase. The analysis that results from the equilibrium point in its modalities, helps the entrepreneur to make decisions in the three different aspects on which the progress of a company has to be resolved and reviewed on a daily basis, by monitoring that expenses are not exceeded and sales do not fall according to the established parameters.
In the following video series (3 videos, 1 hour), you will learn more about how to calculate the breakeven point, not only from a theoretical point of view but also in practice using MS Excel.
